Monday, December 15, 2008

ORAN, Algeria, Dec 15 (Reuters) - The world's top oil exporter Saudi Arabia has already cut supply in anticipation of OPEC agreeing further curbs at its meeting on Wednesday, OPEC's President said on Monday.

Chakib Khelil said the kingdom's oil minister Ali al-Naimi informed him Riyadh had cut its supply by eight percent. OPEC's last overall cut of 1.5 million barrels per day (bpd), agreed in October, was just over 5 percent.

"Everybody is supporting a cut -- I don't have any doubt about it. The Saudis have already taken a decision ahead of the meeting, as you know, they have reduced their supply to the market by 8 percent, which has had an affect on the market," Khelil told reporters.

"The Saudi minister has declared he is producing 8.399 (million barrels per day)."

Khelil reiterated that OPEC ministers were in agreement on the need to cut output at the Wednesday meeting. The first ministers are expected to arrive in Oran later on Monday.

He said there was an oversupply of 400 million barrels in the oil market. OPEC is expected to make a cut of 1-2 million barrels per day, and Khelil was asked how long he thought it would take for a reduction to clear the overhang.

"If we decide on one (million bpd cut) it will take 400 days, if we decide two it will take 200 days," he said. Khelil said he expected global oil demand to drop by 200,000 bpd in the first quarter of next year and by another 1.2 million bpd in the second, but then to pick up.

Khelil, also Algeria's oil minister, was asked about possible Russian involvement in any OPEC output decision.

"They have already expressed their support -- we are hoping for concrete support," he said.

Asked whether Russia could join the group, he said: "We have always hoped they will join OPEC. Russia would give particular weight to OPEC."

With Russia on board OPEC would account for around 50 percent of world oil supply rather than around 40 percent at present, he added.

The head of Russia's LUKOIL said on Monday he expected Russia to offer an output cut of 200,000-300,000 bpd to support an OPEC reduction [nLF660884].

Analysts have said Russia is unlikely to become a member of the exporter group, although it regularly attends its meetings as an observer.

Wednesday, December 10, 2008

Crude oil rose as traders bought contracts to close out bets that prices will fall and on signs that OPEC will cut production twice in as many months.

OPEC, which pumps 40 percent of the world’s oil, may reduce its output limit by as much as 2.5 million barrels a day to reverse recent declines, billionaire hedge-fund manager Boone Pickens said yesterday. Traders who held short positions, or bets prices would fall, are purchasing futures after oil dropped more than 20 percent in the past two weeks.

“For short-term traders, for scalpers, that kind of drop is definitely a buy signal,” said Jonathan Kornafel, director for Asia at options trader Hudson Capital Energy in Singapore. “Everyone is waiting to see what OPEC does. There are enough things to support the market but nothing to propel it higher.”

Crude oil futures for January delivery rose as much as $1.42, or 3.4 percent, to $43.49 a barrel in after-hours electronic trading on the New York Mercantile Exchange. It was at $43.01 a barrel at 3:37 p.m. Singapore time. Yesterday, futures fell $1.64, or 3.8 percent, to $42.07 a barrel, capping a 23 percent drop since Nov. 26.

OPEC should make a “substantial” output cut when it meets on Dec. 17 in Algeria, Shokri Ghanem, Libya’s top oil official, said on Dec. 8. OPEC agreed on Oct. 24 to cut daily output by 1.5 million barrels.

Obama’s Plan

OPEC will “work it back up to $100,” Pickens said in an interview in New York. “It will all be determined by the global economy. If you get a recovery in the global economy, you will get it back up.”

U.S. President-elect Barack Obama proposed on Dec. 7 an economic stimulus plan based on infrastructure development to help lift the country out of its worst recession since World War II. Australia will start making one-time payments to families and pensioners under a A$10.4 billion grant program and China may cut personal income tax.

OPEC’s agreed 1.5 million barrel-a-day cut would be larger than a forecast drop in demand by the U.S. Energy Department. Global oil consumption will average 85.75 million barrels a day in 2008, down 50,000 barrels from 2007, the department said in its Short-Term Energy Outlook yesterday.

Global demand fell every year from 1980 to 1983, according to the department, the last time there was a yearly consumption drop. Oil usage will decline an additional 450,000 barrels a day next year to 85.3 million barrels a day, the department said.

2009 Forecasts

The International Energy Agency and OPEC have lowered demand forecasts in the past month because of the economic contraction.

The IEA reduced its 2009 estimate by 670,000 barrels a day, or 0.8 percent, to 86.5 million barrels a day in a Nov. 13 report. The Organization of Petroleum Exporting Countries cut its forecast for next year by 530,000 barrels a day, or 0.6 percent, to 86.68 million barrels a day, in its monthly oil market report on Nov. 17.

Traders are betting that oil for January delivery may fall below $42 a barrel, according to data on put options contract volume from the New York Mercantile Exchange. Crude may decline to $25 a barrel next year as demand drops on the economic contraction, Merrill Lynch & Co. said last week.

Crude oil jumped 9.5 percent, the biggest gain in five weeks, after the Saudi Arabian oil minister said he had delivered the output cuts promised to OPEC, a sign that world supplies are smaller than traders had estimated.

Ali al-Naimi, the Saudi minister, said in an interview in Poznan, Poland, that the kingdom pumped 8.493 million barrels of oil a day in November, close to its OPEC production quota of 8.477 million barrels a day. That’s 287,000 barrels a day less than estimated by the International Energy Agency.

“It’s quite unusual for the Saudis to make this kind of statement, and it should give confidence that they are following through with the cuts,” said Chip Hodge, a managing director at MFC Global Investment Management in Boston, who oversees a $5 billion energy-company bond portfolio. “This may encourage others to behave similarly to end the free-fall in prices.”

Crude oil for January delivery rose $4.15 to $47.67 a barrel at the 2:30 p.m. close of floor trading on the New York Mercantile Exchange. Futures are heading for the biggest gain since Nov. 4. Oil is up 17 percent so far this week, the largest one-week gain since June 1998, when OPEC slashed output by more than 3.1 million barrels a day.

Saudi Arabia’s oil production was “absolutely” in line with its OPEC quota, al-Naimi said today in an interview in Poznan, where he is attending climate-protection talks. He declined to comment further on OPEC policy.

“The Saudis might have been impatient with the market’s skepticism, so they’ve decided some transparency is needed,” said Mike Wittner, head of oil market research at Societe Generale SA in London. “It shows they’re deadly serious about cutting already and serious about cutting more.”

Further Reduction

OPEC’s previous oil-supply cuts aren’t enough, and the group will need to make a “substantial” additional reduction at its next meeting, on Dec. 17 in Oran, Algeria, Shokri Ghanem, Libya’s top oil official, said in a Bloomberg TV interview today.

“The Oran meeting will decide a severe production cut to stabilize the oil market,” OPEC President Chakib Khelil, who is also Algeria’s oil minister, said in an interview on state radio today. “There is a consensus to reduce production.”

Oil has tumbled 25 percent since the Organization of Petroleum Exporting Countries, which supplies about 40 percent of the world’s oil, announced a 1.5 million-barrel-a-day output cut on Oct. 24 in Vienna. Prices fell as fuel demand slumped and speculation grew that some members weren’t complying with their agreed-on quotas.

“The OPEC heavyweights are all serious about getting prices higher, so they will make the cuts,” said Sarah Emerson, managing director of Energy Security Analysis Inc., a consulting firm in Wakefield, Massachusetts.

Russia’s Option

Russian President Dmitry Medvedev said his country, the second-biggest oil producer, may join OPEC and reduce output to support prices, RIA Novosti reported from Kurgan, Russia.

Futures, which have dropped 53 percent this year, are heading for the biggest annual decline since trading began in 1983, as global economies falter.

Oil for delivery in December 2009 traded at a $13.11 premium to January futures, down from a $14.27 premium on Dec. 8. The shrinking spread may indicate that storage space for oil is scarce and that the crude is being sold on the spot market, said Stephen Schork, president of the Schork Group, an energy markets analysis company in Philadelphia.

This price structure, when the subsequent month’s price is higher than the one before it, is known as a contango.

“You are starting to see a shift in the curve,” Schork said. “You are starting to see a return of demand to the front of the board.”

Inventories Climb

Contango trading encourages companies to increase stockpiles. U.S. crude-oil supplies rose in 10 of the past 11 weeks, according to the Energy Department.

“The weaker dollar and the likelihood of a significant OPEC cut is sending the market higher,” said Peter Beutel, president Cameron Hanover Inc., an energy consulting company in New Canaan, Connecticut. “These are the strongest reasons we’ve seen for a rally since prices started to slide in July.”

The Paris-based IEA, an adviser to 28 nations, said global oil demand will contract this year for the first time since 1983 and reduced its outlook for 2009.

Consumption worldwide will shrink in 2008 by 200,000 barrels a day, or 0.2 percent, the IEA said in a monthly report today. The reduction in demand is concentrated in developed economies in the Organization for Economic Cooperation and Development, where oil use will tumble 3.3 percent. Next year’s growth may be wiped out if the economic slump deepens, the agency said.

OPEC, supplier of more than 40 percent of the world’s oil, agreed to cut production quotas by a larger- than-expected 9 percent to revive prices as a global recession reduces demand for crude.

The Organization of Petroleum Exporting Countries set a quota for 11 of its members of 24.845 million barrels a day, starting Jan. 1, compared with its current target of 27.308 million barrels a day, OPEC President Chakib Khelil said. The record 2.46 million barrel-a-day cut is larger than a 2 million-barrel drop indicated yesterday by Saudi Arabian Oil Minister Ali al-Naimi.

“OPEC is sending a message that they are trying to cut pretty seriously,” said Mike Wittner, head of oil research at Societe Generale SA in London. “If they need more cuts, there will be more cuts.”

Crude oil fell as low as $39.88 a barrel in New York, the lowest since July 2004, on skepticism OPEC will adhere to its new agreement and after a government report showed rising U.S. crude stockpiles. Oil’s $100-a-barrel collapse from July’s record has curbed revenue for producers, threatening government budget shortfalls. Saudi Arabia’s King Abdullah said last month that producers need crude at $75 to spur investment in new fields.

Russia, the biggest oil exporter outside of OPEC, today pledged to curb exports too, as it did a decade ago when oil sank toward $10 a barrel.

‘Dramatically Low’

“If OPEC would not do what it has to do given demand destruction, the price could stay at a level that is really dramatically low,” Venezuelan Oil Minister Rafael Ramirez said after today’s meeting.

OPEC announced the new quota by saying the group had agreed to reduce output by 4.2 million barrels a day from September’s actual production level of 29.045 million barrels a day for the same 11 nations. That measure of actual production came from an average of analyst and news agency estimates compiled by OPEC’s Vienna-based secretariat.

To be sure, OPEC often pumps more than its quotas permit. Last month, the 11 nations, excluding Iraq and Indonesia, pumped 629,000 barrels a day more than the ceiling, according to OPEC’s monthly report. U.S. Energy Information Administration acting head Howard Gruenspecht said compliance with cutbacks will be “critical” in determining how oil markets will react.

Today’s decision is OPEC’s biggest ever reduction in quotas, exceeding a 1.9 million-barrel, 8.3 percent cut agreed in March 2000, when Iran was temporarily excluded from the ceiling. The new quota will be 2.2 million barrels a day lower than OPEC’s December production, Khelil said.

Russian Help

Russia may cut exports by 320,000 barrels a day next year if prices remain weak, after reducing daily exports by 350,000 barrels last month, Russian Deputy Prime Minister Igor Sechin said earlier today in Oran.

Other non-OPEC producers, including Kazakhstan, may trim supply as well, Sechin said. Azerbaijan may lower production as much as 300,000 barrels a day, Azeri Energy Minister Natig Aliyev said in Oran. Mexico’s energy ministry spokesman Hector Escalante yesterday declined to say whether it will aid OPEC cuts while Norway has said it has no plans to lower production.

Forecasts for oil consumption have shrunk during the past few months as the global recession weighs on consumers and industries. The International Energy Agency says global oil demand will contract this year for the first time since 1983.

In the U.S., oil consumption will be almost flat through 2030, as the use of biofuels, rising prices and new car efficiency standards temper demand, the Energy Information Administration, part of the U.S. Energy Department, said in a statement today.

London Summit

“The fall in oil prices in recent months has benefited the economy at a difficult time and helped hard-pressed consumers,” U.K. Energy Minister Mike O’Brien said in a statement after OPEC’s announcement. The U.K. will host a summit of energy ministers, including Saudi’s al-Naimi, in London in two days time.

Falling oil prices may delay or halt investment in exploration and production projects, setting up a possible “supply crunch” in future years, IEA Chief Economist Fatih Birol said on Dec. 10. Cheaper fossil fuels may also deter efforts to develop wind, solar and other alternative energy sources.

Oslo-based StatoilHydro ASA and Royal Dutch Shell Plc of The Hague postponed investments in Canada’s oil sands this year after tumbling prices reduced potential profits.

Saudi Arabia’s Manifa oil field will start in 2011 only if consumers require the extra crude, al-Naimi said in an interview today. “When we need it, it will be there,” he said, adding that the start of the field depends on the “market situation.”

OPEC will next meet on March 15 in Vienna and chose Angolan Oil Minister Jose Maris Botelho de Vasconcelos as its president for 2009.

Saturday, November 1, 2008

This is a good chart from the Canadian Association of Petroleum Producers. It comes from a 48-page PDF report available on their website detailing current production and forecasting production out decades. Also available is a spreadsheet containing two different scenarios and a breakdown of all the numbers. From the dotted line here, it appears they have lowered last year's forecast by about 200,000 barrels per day total going forward.

The top slice is offshore production in Newfoundland which is not considered "conventional." The thick, expanding slices in the middle are tar-sands/oil-sands production. The bottom three declining slices are conventional onshore production in Western Canada.

Canadian Oil Sands Production

following are some articles on the recent scaling back of oil-sands projects due to the lower price of crude:

Current industry forecasts see oil sands output more than doubling to 2.8 million barrels a day in 2015, but this is more modest than last year's forecasts, as regulatory delays and vague environmental rules take their toll. The Canadian Association of Petroleum Producers, an industry lobbying group, publishes the widely watched annual forecasts.

These extra barrels may not immediately be missed given the dismal demand outlook in the U.S., where nearly all of Canada's oil exports are destined. But cutbacks to new and existing energy ventures may threaten future oil flows and cause a spike in prices down the road, as oil executives play a game of brinksmanship with their suppliers.

OPEC's oil output in October is expected to rise by 200,000 barrels per day to 31.9 million bpd because of higher supplies from Iraq, industry consultant Petrologistics said on Wednesday.

The estimate also indicates that the Organization of the Petroleum Exporting Countries, excluding Iraq, is trimming output back to official target levels, in line with a Sept. 10 agreement to prop up prices.

Output from the 12 OPEC members with supply targets -- all except Iraq -- is expected to average 29.59 million bpd, little changed from 29.56 million bpd in September and less than their target of 29.67 million bpd.

"This has come down from well over 30 million barrels per day in August and is expected to come down further in November," Conrad Gerber, head of Petrologistics, told Reuters by telephone from Geneva.

Output is set to fall further, from November, following OPEC's decision on Oct. 24 to cut production by 1.5 million bpd in response to a steep fall in prices to about $66 a barrel, less than half the record high of $147.27 reached in July.

From Nov. 1, the production target for 11 OPEC members will drop to 27.3 million bpd.

OPEC's Gulf members are already trimming output, according to Petrologistics. Top exporter Saudi Arabia is expected to pump 9.05 million bpd in October, down from 9.2 million bpd in September.

Kuwait is forecast to lower supply by about 120,000 bpd in October and the United Arab Emirates is expected to curb output by 130,000 bpd, Gerber said.

Higher supply elsewhere in the group in October is offsetting the declines.

Angolan production is expected to rise by about 200,000 bpd because the BP Plc-led Plutonio field returned to service after maintenance work.

Iranian supply is forecast to climb to 3.85 million bpd from 3.7 million bpd in September. Its exports can vary month-to-month, affecting supply, while oilfield production remains steady.

Iraqi exports are rising in October, boosting supply to 2.31 million bpd from 2.14 million in September and accounting for the increase in overall OPEC output.

Petrologistics measures OPEC supply, which excludes oil produced but sent into storage, by tracking tanker shipments. OPEC itself does not issue timely estimates of its members' output.

Monday, October 27, 2008

Yet another profile of wind crusader T. Boone Pickens aired Sunday night — this time on 60 Minutes — and it had the usual details about the 80-year-old former oil baron’s plan to get the U.S. off its addiction to foreign oil. But 60 Minutes did score an interesting tidbit about how much Pickens and his investment firm BP Capital have lost since oil and natural gas prices started dropping in July: $2 billion!

The steep drop in oil and gas prices since July has cut the value of Pickens’ hedge fund in half. . . Overall, Pickens and BP Capital are down a staggering $2 billion. . . Boone acknowledges that is serious money. Asked if he’ll get it back again, he says, “Yeah, I’ll get it back.”

At the end of September the Wall Street Journal estimated that Pickens’ funds had lost about $1 billion this year, including $270 million of personal losses. “It’s my toughest run in 10 years,” Pickens told the Journal. “We missed the turn in the market, there’s nothing fun about it.”

But Pickens also told the Journal that he thought oil would finish the year around $120 or $125, barring a major global economic downturn. Well, the international economic downturn appears to be here. On Friday oil prices dropped to around $63. While it’s pretty hard to predict oil prices these days, we’re not sure it’s set to double in 2 months.

Click on following link to download updated Excel spreadsheet(450 kb):http://www.savefile.com/files/1861608scroll down to bottom of linked page and hit orange button on right andthen hit second prompt if download doesn't start immediately

Sunday, October 19, 2008

In response to the rapidly falling price of crude oil, OPEC has called an 'emergency' meeting for this week, a month earlier than planned. Actually, two months early, since the November meeting was rescheduled not long ago from December.

Here are some charts showing what OPEC has actually been producing versus their quota levels.

This first chart contains only 9 of the 13 OPEC countries. Not included are the following:

Iraq - has no assigned quota.Angola and Ecuador- these countries have only had quotas assigned since January. There have been no official changes to OPEC production quotas since then.Indonesia - has been a net importer for years, has been producing far under its quota for years, and is leaving OPEC in January. Indonesia will not be included in any of the data contained in these charts.

This is what happened in the chart above: OPEC made two cuts of 1.2 mbpd in November 2006 and 500,000 bpd in February 2007. Those cuts remained in place until the September 2007 meeting, at which OPEC decided to raise production by about 500,000 bpd. So why does the raise look like it makes up the entire 1.7 mbpd that was originally cut? This is because OPEC finally decided to get partially serious and base their decisions on what was actually being produced by member countries instead of on their quota numbers. The result was to come up with new "production targets" which were composed of an equal distribution of about 500,000 bpd over July 2007 production numbers.

There are some interesting stories here, but the bottom line is this - the two countries who are most frequently labeled "price-hawks," Venezuela and Iran, have not been carrying their weight for the last few years when it comes to managing production levels. It is well known that Saudi Arabia is the lone, real swing-producer in the group, but Iran rarely alters its production significantly and Venezuela chronically underproduces its quota.

I think it can be generally assumed that the UAE, Kuwait, and Qatar (as solid allies of both the West and Saudi Arabia) fall in line with "what is expected from the team" as they say in auto-racing. Algeria and Libya might also be included in this group, however, the production levels of all these countries combined only equal Saudi's.

More and more it seems that OPEC quota/production changes are an attempt by Iran and Venezuela to get Saudi Arabia to lower its production. It doesn't appear that either has the ability to increase its production for various reasons and lowering production only means they bring in less dollars than they could if Saudi Arabia did more of the heavy lifting.

There are a few interesting things to note here (shown clearly in the chart):1) OPEC seems to anticipate quota changes by a number of months and begin to react in that direction. Or maybe this is just the Saudi group acting on its own.2) OPEC almost always cheats as a group. They over-produce by 500,000 bpd.3) (Not clear from this chart, but you can see where it happened) When OPEC hit its low in the summer of 2007, Saudi Arabia was on target at its quota of 8.6 mbpd. Which means that all the cheating at that point was being done by the other 8 countries. Of course, after the quota had been raised Saudi was doing most of the cheating, producing as much as 800,000 bpd over their quota in July and August.

OPEC, the supplier of more than 40 percent of the world's oil, plans to cut output for the first time in almost two years as the worst financial crisis since the 1930s sends crude toward $50 a barrel.

Options contracts to sell oil at $50 by December soared 28- fold in the past two weeks on the New York Mercantile Exchange. Goldman Sachs Group Inc. and Merrill Lynch & Co. analysts say crude, which fell more than 50 percent from a record high in July to $71.85 a barrel last week, may drop another 44 percent should the world economy slip into a recession.

The Organization of Petroleum Exporting Countries, which meets Oct. 24 in Vienna, three weeks earlier than planned, is facing the weakest growth in demand since 1993 just as new fields come on line from Angola to the Gulf of Mexico.

``OPEC is going to try to prevent some of the price decline,'' Francisco Blanch, head of global commodities research at Merrill in London, said in a Bloomberg television interview. ``It's going to be very difficult to stem a price fall.''

Options contracts that allow holders to sell 1,000 barrels of oil for $50 each by December closed at $280 on the Nymex on Oct. 17, up from $10 on Oct. 3.

Even at today's prices, Venezuela and Iran, two of the organization's 13 members, may struggle to balance budgets because they rely on energy sales for more than half of their revenue, according to estimates compiled by the U.S. Central Intelligence Agency.

GDP Down 25%

``Some countries like Venezuela and Iran need prices above $80 a barrel,'' said Leo Drollas, deputy director of the Centre for Global Energy Studies, a London-based consulting company. ``The Saudis have a bottom price of about $65 a barrel, but they might go ahead with a cut to keep solidarity within OPEC.''

Ministers from Algeria, Libya, Iran and Venezuela already called for a reduction in supplies from the current quota of 28.8 million barrels a day. OPEC President Chakib Khelil, who is also Algeria's oil minister, said on Oct. 16 the ``ideal'' price for crude is between $70 and $90 a barrel. A week earlier he said OPEC is ``very likely'' to lower production.

Qatari Oil Minister Abdullah bin Hamad al-Attiyah told Al Jazeera TV the cut will likely be 1 million barrels a day, or 14 percent more than his nation pumps. Saudi Arabia, which dominates OPEC proceedings as the group's largest producer, has yet to comment on its intentions.

Reducing Estimates

While OPEC already agreed to curb production by observing output quotas after a Sept. 10 meeting to lower supplies by 500,000 barrels a day, members routinely pump more than their allocation, according to data compiled by Bloomberg. Since that session, Credit Suisse Group pared its forecast for oil next year by 32 percent to $75 a barrel. Deutsche Bank AG cut its 2009 assessment by 23 percent to $92.50 on Sept. 29. BNP Paribas SA lowered its outlook by 18 percent to $92.50 on Oct. 10.

At the same time, Exxon Mobil Corp.'s Saxi-Batuque fields off Angola's shore started pumping in August, while BP Plc's Thunder Horse field in the Gulf of Mexico is scheduled to increase supplies by the end of the year. World oil capacity will rise 1.45 million barrels a day in 2009, twice the rate of growth in demand, according to the International Energy Agency.

``Prices could fall as low as $50 a barrel during the fourth quarter if OPEC can't find a way to offset the financial meltdown,'' said Michael Lynch, president of Strategic Energy & Economic Research in Winchester, Massachusetts.

OPEC lowered its forecast for demand in 2009 last week, saying consumption will be 450,000 barrels a day less than expected at 87.21 million a day. The Paris-based International Energy Agency shaved its 2009 outlook the previous week and said this year's demand growth of 0.5 percent will be the weakest since 1993.

U.S. motorists are driving less after gasoline pump prices topped $4 a gallon in July. Vehicle-miles traveled on all U.S. roads that month were 3.7 percent lower than a year earlier, Federal Highway Administration data show. Prices fell to an average of $3.21 a gallon last week, according to the Department of Energy.

Output Cut

As demand declined, OPEC trimmed supplies 3.8 percent to 31.8 million barrels a day in September, according to Geneva- based tanker-tracking service PetroLogistics Ltd. Saudi Arabia's volume fell 520,000 barrels a day to 9.18 million, PetroLogistics said.

``This may be OPEC's toughest balancing act in their history,'' said Tetsu Emori, the fund manager at Astmax Co. in Tokyo, Japan's biggest commodities asset manager with $200 million under management. ``By the time OPEC announces a cut, they would be hoping to have seen the bottom of the price.''

The last time OPEC slashed quotas was at a December 2006 meeting in Abuja, Nigeria. That 500,000 barrel-a-day cut took effect in February 2007 and followed an earlier, 1.2 million- barrel reduction in October 2006. Those actions were reversed later in 2007 as prices rallied.

``The situation has gotten dire enough that they're willing to move and even become a topic of conversation'' during the U.S. election campaign, Ronald Smith, chief strategist at Alfa Bank in Moscow, said in a Bloomberg television interview. OPEC will cut by 1 million barrels a day ``at the very minimum'' and potentially ``wait until after the election, then add another million on top of it, or half a million,'' he said.

OPEC on Sept. 14 published a table on its Web site showing individual member production targets. The OPEC Secretariat removed the table after Venezuela protested that the published table wasn't official. (2007)

Wednesday, October 15, 2008

China is a net importer, but its status as the second largest petroleum consumer along with its ambiguous production situation makes it the most interesting oil story next to Saudi Arabia.

Its thriving economy and double-digit increases in petroleum consumption are setting it on a path to conflict with other importers as it tries to secure future supplies. For the last few years there have been many forecasts of China's production plateauing and falling. So far that hasn't happened. Yet interestingly, if we look at the oil China has already produced and its known reserves, we can get a good look at the problems involved with forecasting peak oil using Hubbert's methods. China was the first good example that demonstrated this issue, but I will cover more countries in the coming months.

Notes on reserves and 70% URR

The BP Annual Statistical Review starts tracking production in 1965, but that is sufficient in this case. China produced an average 227,000 bpd of oil in 1965, or about 6% of their present production level. This strongly suggests that previous to 1965 China's cumulative production was no greater than 500 millions barrels or a billion barrels. At the end of 2008, China will have produced a total of about 38 billion barrels. In 2008, China will produce 1.38 billion barrels.

BP lists China's proved reserves at the end of 2007 as 15.5 billion barrels, minus the 1.4 used this year leaves them with 14.1, meaning that the current rate, they would run out of oil in 10 years. But we know that oil production does not behave in that manner and they won't simply be out of oil 11 years from now. Production drops and tapers off. I've constructed the following chart to illustrate one possibility based on the available data.

Adding 38 billion barrels to 14.1 billion barrels we get 52.1 billion barrels of what are commonly referred to as URR, or ultimately recoverable reserves. This means that presently we are at 73% of URR. According to Hubbert, production should level off and start dropping around 50% of URR, suggesting China's production should have started dropping in the early 1990s at the latest.

But let's continue. Over the last 20 years, China has discovered and added to its proved reserves an average of about 1 billion barrels per year. If we assume this trend will continue and add 20 billion barrels onto a final analysis, we get a much prettier 53% of URR.

This next chart shows is constructed with a theoretical, additional 10 billion barrels of reserves added. I'll add one soon with the 20 billion barrels.

Here are excerpts from two articles and a report referencing the current situation in China. There may be conflicting forecasts/expectations of what the immediate future holds contained in them but they provide a good look at China's consumption and what is effecting it.

World Auto Sales to Hit Record High on Soaring Demand from BRIC Countries

Despite the systemic problems facing the US auto market, the world market has seldom been better. This year should mark the seventh consecutive record for annual vehicle sales, led by continued strength in Brazil, Russia, India, China (BRIC) and the rest of the developing world. While vehicle sales in the second quarter fell a combined 7% in the United States, Canada, the European Union and Japan, they were up 20% in BRIC countries. In fact, total annual sales in these countries are expected to overtake the US next year for the first time ever.

Moreover, the very models that American motorists are shunning, motorists overseas are snapping up. SUV sales, which already make up roughly 8% of the red-hot Chinese car market, are up 40% since the beginning of the year, and demand for such vehicles is similarly strong in Russia as well. So great is the demand for SUVs in the Chinese market that General Motors plans to start shipping the Michigan-made Buick Enclave, a seven-passenger vehicle, to China. SUV demand is growing at double the rate of any other class of vehicle in the Chinese market and four times the pace of sales of fuel-efficient subcompact cars. As their own domestic auto market shrinks, American car companies better look overseas if they hope to be able to see sales growth in the future.

China, India and other big energy users in Asia aren't about to become major oil exporters -- far from it. They still consume much more crude than they produce and that trend won't change.

But several countries, including China, are lifting oil output. The unexpected boost -- some industry analysts had said the region would struggle to maintain production levels in the current decade -- should help Asia meet more of its own demand and reduce stress on supplies for the rest of the world.

The International Energy Agency in Paris expects China, Vietnam, Malaysia and other Asian-Pacific nations to increase production by almost 300,000 barrels of oil a day in 2009, the region's biggest annual increase since at least the 1990s. When contributions from Central Asian nations such as Kazakhstan are added, the total increased production rises to about 500,000 barrels per day, analysts say. Overall, non-OPEC world production is only expected to grow about 760,000 barrels a day in 2009, the IEA says.

Asia's increased crude production is still a drop in the bucket compared to total world consumption, which is now approaching 87 million barrels a day. Moreover, many analysts believe Asian output will start falling in a few years, as big existing fields decline. Although growing at a slower pace in recent months, consumption continues to rise across the region, which means that any easing of supply pressures could be short-lived.

A lot of people who forecast the future tend to draw a straight line forward from existing trends. That's why people forecast a continuation of the breakneck increases in Chinese oil consumption.

There are at least two reasons to question that. One is that the current financial crisis could hammer the U.S. economy, and cut deeply into our purchases of all kinds of stuff, including stuff that comes from China. If that happened, it's doubtful that China would keep up its double-digit economic growth in the coming months.

The other reason is more benign: China has drastically raised fuel prices, effectively slashing its subsidies for motor fuel. And we all know that when retail petroleum product prices rise sharply, we tend to use less of them. Will the Chinese be any different?

It's a question that matters to every one of us, whether a car owner or simply a consumer who buys goods that travel in trucks. That's because the challenge of meeting rising Chinese demand is expected to keep oil markets tight and prices high even if Americans buy more efficient cars.

I would think that given the relatively limited means of the average Chinese wage earner, Chinese drivers would be even more sensitive to a sharp increase in fuel prices.

And lo and behold, in August Chinese gasoline demand fell 5.6 percent, or 470,000 barrels a day, below June and 2.7 percent, or 200,000 barrels a day, below July levels.

One month is not enough to reach many conclusions, especially when that month and the months preceding it may have been distorted by stockpiling of fuel in advance of the Olympic games that took place in Beijing in August. (Ting notes that China went on an "inventory building binge" in November 2007 and that its gasoline and diesel inventories grew by 83 percent by August this year.) And the August consumption figure was still up 7.1 percent from August last year.

I would argue that higher prices will put China on a new, more gradual growth trajectory - with consumption still rising, but at a pace that should ease some of the pressure on oil markets, and prices at the pumps throughout the rest of the world.

The London-based consultancy that tracks tanker exports said oil shipments from 11 OPEC producers, including Iraq, fell to 23.031 million bpd, down from 23.644 million bpd in the four weeks previous.

LMIU said supply from big Gulf producers, including Iraq, dropped 844,000 bpd from 18.553 million bpd to 17.709 million bpd in the same four weeks.

OPEC decided at a meeting in Vienna on Sept. 9-10 to comply strictly with its formal output target, a move officials said would result in the group trimming supply of crude oil by about 500,000 bpd from world markets.